Zilka, D., Aplt. v. Tax Review Bd. City of Phila.
[J-5A-B-2023] (2023)
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Rule of Law:
The dormant Commerce Clause does not require state and local taxes to be aggregated for analysis, and a resident-based local wage tax scheme that provides a credit for similar local taxes paid to another jurisdiction, but not for state income taxes, does not unconstitutionally discriminate against interstate commerce if it satisfies the Complete Auto Transit test for internal and external consistency.
Facts:
- Diane Zilka resided in the City of Philadelphia.
- Diane Zilka worked exclusively in Wilmington, Delaware.
- During the tax years 2013-2016, Diane Zilka was subject to the Philadelphia Tax (3.922%), the Pennsylvania Income Tax (PIT) (3.07%), the Wilmington Earned Income Tax (1.25%), and the Delaware Income Tax (DIT) (5%).
- The Commonwealth of Pennsylvania granted Diane Zilka a credit for her DIT liability, which completely offset her PIT liability, leaving a remaining 1.93% DIT liability.
- The City of Philadelphia credited Diane Zilka 1.25% against her Philadelphia Tax liability for the amount she paid in the Wilmington Tax, leaving a remainder of 2.672% owed to the City.
- Diane Zilka claimed that the City was required to afford her an additional credit of 1.93% against the Philadelphia Tax, representing the remainder of the DIT she owed after the Commonwealth credited her for her PIT.
Procedural Posture:
- In April and June 2017, Diane Zilka filed petitions with the City’s Department of Revenue seeking refunds for the Philadelphia Tax paid from 2013 to 2016, which the City refused.
- Diane Zilka appealed to the City’s Tax Review Board, which denied her refund request after two hearings.
- Diane Zilka appealed the Board's decision to the Court of Common Pleas of Philadelphia County, Civil Division, which affirmed without taking additional evidence.
- Diane Zilka (Appellant) appealed to the Commonwealth Court, which affirmed the trial court's decision in a unanimous, unpublished memorandum opinion.
- Diane Zilka (Appellant) filed a petition for allowance of appeal with the Supreme Court of Pennsylvania.
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Issue:
Does the City of Philadelphia's wage tax scheme, which subjects a resident working exclusively out-of-state to the tax and allows credit only for local income tax paid to another jurisdiction but not for state income tax, unconstitutionally discriminate against interstate commerce by failing the Complete Auto Transit test or by requiring the aggregation of state and local taxes?
Opinions:
Majority - Chief Justice Todd
No, the City of Philadelphia's tax scheme does not unconstitutionally discriminate against interstate commerce, as state and local taxes need not be aggregated for dormant Commerce Clause analysis, and the scheme satisfies the Complete Auto Transit test. The court rejected Appellant's argument for aggregating state and local taxes, distinguishing Comptroller of Treasury of Md. v. Wynne. In Wynne, Maryland's 'county' tax was deemed a state tax in disguise because it was enacted and collected by the state. Conversely, the Philadelphia Tax was enacted by Philadelphia’s City Council and collected by the City’s Department of Revenue solely for the benefit of the City, making it a purely local tax. The court also found Appellant's reliance on Philadelphia Eagles Football Club, Inc. v. City of Philadelphia, Northwood Construction Co. v. Township of Upper Moreland, Upper Moreland Township v. 7-Eleven, Inc., and out-of-state cases (Arizona Public Service, General Motors, Matkovich) unpersuasive or inapposite. Applying the Complete Auto Transit test, the court concluded that the Philadelphia Tax is internally consistent because if all local taxing jurisdictions adopted Philadelphia’s tax rate (3.922%) and its practice of crediting local taxes paid out-of-state, both in-state and out-of-state taxpayers would pay the same net tax. Any remaining 'disparate incentives to engage in interstate commerce' stem solely from 'the interaction of two different but nondiscriminatory and internally consistent schemes,' such as Delaware's higher state income tax rate, not from inherent discrimination in Philadelphia’s scheme. Furthermore, the tax scheme is externally consistent, as domicile provides a sufficient economic justification for the City to tax its residents, and the City avoided taxing more than its fair share by providing a credit for the entire Wilmington Tax amount.
Concurring - Justice Wecht
Content of concurring opinion not provided in the case text.
Dissenting - Justice Dougherty
Content of dissenting opinion not provided in the case text.
Analysis:
This case clarifies the application of the dormant Commerce Clause to overlapping state and local tax schemes, particularly by rejecting a blanket requirement for aggregating state and local taxes. It reinforces the functional analysis established in Comptroller of Treasury of Md. v. Wynne for determining if a 'local' tax is truly a state tax in disguise. The ruling provides important guidance for municipalities and states regarding the constitutionality of resident-based wage taxes when residents work out-of-state, confirming that a disparate tax burden arising from differing tax rates across jurisdictions, rather than a discriminatory tax structure, is generally permissible under the dormant Commerce Clause.
